Kenneth Cesta

Third Circuit Affirms Finding That Defendant Waived Its Arbitration Rights

March 24, 2023 by Kenneth Cesta

In White v. Samsung Electronics America Inc., the Third Circuit Court of Appeals, in a precedential opinion, affirmed a district court order denying defendant Samsung’s motion to compel arbitration, concluding that, “[t]hrough its actions expressing an intent to litigate, Samsung waived its right to arbitration.”

The plaintiffs in this putative class action filed in 2017 brought claims alleging that Samsung, and others, illegally monitored their use of certain internet-based services on their smart TVs and collected personally identifying information, which they transmitted to third-party advertisers and data brokers. The “terms and conditions” the plaintiffs had to accept when setting up their smart TVs included an arbitration provision. Samsung initially moved to dismiss the complaint; however, the parties agreed to a stay and administrative dismissal of the case. In early 2018, the case was reinstated when the plaintiffs filed an amended complaint, which Samsung again sought to dismiss. Samsung also submitted a proposed discovery plan, which did not raise the arbitration provision or a possible motion to compel arbitration. The district court granted the motion to dismiss, after which the plaintiffs filed a second amended complaint in November 2018, which Samsung again moved to dismiss. The district court granted the motion in part, dismissing all but the Wiretap Act claims.

In May 2020, Samsung filed a motion to compel arbitration, which was denied without prejudice. Samsung then refiled its motion to compel in May 2021, arguing that “it did not waive its right to arbitrate because ‘the prerequisites of waiver — extensive discovery and prejudice — are lacking, and the [relevant] factors do not support a finding of waiver.’” The district court denied the motion, concluding that Samsung had waived its right to arbitrate, and the plaintiffs would suffer “significant prejudice” if compelled to arbitrate. Samsung appealed the district court’s decision to the Third Circuit, and while the appeal was pending, the U.S. Supreme Court issued its decision in Morgan v. Sundance Inc. Through supplemental briefing, Samsung brought the decision in Morgan to the court’s attention, arguing that the decision rejected a “prejudice-based waiver analysis” in connection with motions to compel arbitration.

Relying on the Federal Arbitration Act and the recent decision in Morgan, the Third Circuit concluded that “Samsung’s litigation actions here evince a preference for litigation over arbitration.” The court noted that Samsung agreed to stays in discovery so it could instead pursue its motions to dismiss the plaintiffs’ claims on the merits, which, to Samsung’s advantage, resulted in the dismissal of all but one claim. The court also found that Samsung “engaged in multiple instances of non-merits motion practice and acquiesced to the District Court’s pre-trial orders” and noted that Samsung submitted pro hac vice applications in the case and participated in several court conferences. The court also noted that the discovery plan asked whether the case was subject to court-annexed arbitration and, while the case was not subject to that particular type of arbitration, “Samsung should have disclosed that another type of arbitration may be applicable.” Relying on Morgan, the court affirmed the district court’s decision refusing to refer the matter to arbitration, concluding that Samsung waived its right to arbitrate.

White v. Samsung Electronics America Inc., No. 22-1162 (3d Cir. Mar. 7, 2023).

Ninth Circuit Affirms District Order Refusing to Compel Arbitration

March 22, 2023 by Kenneth Cesta

In City of Laurel, Mississippi v. Cintas Corp. No. 2, the Ninth Circuit Court of Appeals addressed the issue whether a valid arbitration agreement existed between the plaintiff City of Laurel, Mississippi, and defendant Cintas Corporation No. 2. The court affirmed the district court’s order denying Cintas’ motion to stay proceedings and compel arbitration, concluding that “there is no valid arbitration agreement between Cintas and the City.”

The case involved two contracts. The first contract, referred to as the “master agreement,” was between Cintas and “the lead public agency” and included an arbitration clause. The second contract was between Cintas and the city, and included provisions establishing how Cintas would deal with the city and other “participating public agencies.” The parties did not dispute that there was a valid arbitration agreement between Cintas and the “lead public agency” as stated in the first contract. Rather, the dispute focused on whether “the same [arbitration] agreement exists between Cintas and the City.”

The city brought breach of contract claims against Cintas, and the district court denied Cintas’ motion to stay the action and compel arbitration. In affirming the district court’s decision, the Ninth Circuit first noted that under the FAA, “the court is limited to determining (1) whether a valid agreement to arbitrate exists, and, if it does, (2) whether the agreement encompasses the dispute at issue.” The court found the contract between Cintas and the city did not include an arbitration clause, and instead provided that Cintas and the city would resolve disputes “directly between them in accordance with and governed by the laws of the State in which [the City] exits.” The court found that if this language compelled arbitration, “it would be superfluous in light of the arbitration agreement incorporated into the Master Agreement,” noting that courts “must avoid interpreting a contract in a way that would render provisions ‘redundant and superfluous.’” The court also rejected Cintas’ argument that the court should “harmonize” the two contracts by applying the arbitration agreement contained in the contract between Cintas and the lead public agency, citing Morgan v. Sundance Inc., which stated that “a court may not devise novel rules to favor arbitration over litigation.”

In a dissenting opinion, one of the circuit judges concluded that the underlying agreement between the parties compels arbitration of the dispute, and he would reverse the judgment of the district court and remand the case with instructions to compel arbitration.

City of Laurel, Mississippi v. Cintas Corp. No. 2, No. 22-15476 (9th Cir. Mar. 6, 2023).

SDNY Rejects Cross-Petition To Vacate Arbitration Award, Rejecting Claims of Manifest Disregard of Law and “Evident Partiality”

March 3, 2023 by Kenneth Cesta

Recognizing arbitration awards are subject to “very limited review” and should be confirmed, “so long as there is a ‘barely colorable justification’ for the outcome that the arbitrator reached,” the U.S. District Court for the Southern District of New York affirmed the arbitration award in favor of the petitioners, Telecom Business Solution, LLC, LATAM Towers, LLC, and AMLQ Holdings (Cay) Ltd., and denied the respondents, Terra Towers Corp., TBS Management, S.A., and DT Holdings, Inc.’s cross-petition to vacate that award.

The petitioners and respondent, Terra Towers Corp., entered into a shareholders agreement to co-own and operate a business engaged in the operation of telecommunications towers in Central and South America (Company). Terra was the majority shareholder of the Company, and the petitioners were the minority shareholders. The shareholders agreement provided that after five years, the petitioners could unilaterally initiate a sale of the Company, which it did two weeks after the expiration of the five-year period. Terra rejected the sale proposed by the petitioners and sought to buy out the petitioners’ shares of stock in the Company. The petitioners then commenced an arbitration alleging that Terra breached the shareholders agreement “by obstructing their proposed sale of the Company.” The petitioners sought damages from the respondents or specific performance. The petitioners and respondents each appointed one arbitrator who then appointed a third arbitrator to act as chair of the panel. Phase one of the arbitration was limited to the petitioners’ claim for specific performance related to the sale of the Company. After a hearing, the panel issued a First Partial Final Award (FPFA) ordering a sale of the Company. Further disputes developed between the parties after the entry of the FPFA, resulting in the entry by the panel of interim relief, including an injunction. The respondents claimed to the ICDR that there was “‘justifiable doubt’ about their party-appointed arbitrator’s impartiality.” After further submissions on the issue, the ICDR’s International Administrative Review Council denied the respondents’ challenge.

The petitioners filed a petition to confirm the FPFA, and the respondents sought “to vacate the FPFA, asserting that the panel violated “‘fundamental fairness’ by refusing to provide them with ‘a fair opportunity to be heard’ … that the Panel acted in ‘manifest disregard of the law’ … by granting specific performance to Petitioners,” and that there was “evident partiality” by two of the three arbitrators in favor of the petitioners. After noting the grounds on which an arbitration award may be set aside, the court rejected all of the respondents’ arguments and granted the petition to confirm the FPFA. The court found “[n]either the Panel’s decision to phase the arbitration nor the Panel’s denial of discovery in Phase 1 of the Arbitration constituted misconduct that rendered the Arbitration fundamentally unfair.” The court also rejected the respondents’ contention that the FPFA issued was in “manifest disregard of the law,” finding a court’s review under this standard is “severely limited” and a “doctrine of last resort” limited to “rare instances where some egregious impropriety on the part of the arbitrators is apparent.” Finally, the court rejected the respondents’ claim of evident partiality concluding the “ICDR already has carefully reviewed and rejected all of Respondents’ evidence of a purported disqualifying conflict.”

Telecom Business Solution, LLC et al. v. Terra Towers Corp., et al., No. 22-cv-1761 (SDNY, Jan. 18, 2023)

Wyoming Supreme Court Affirms Finding That Arbitrator’s Determinations Did Not Exceed Authority And Were Not Manifest Errors of Law

March 1, 2023 by Kenneth Cesta

Defendant Fork Road, LLC, is the owner of a floor of an office building, which it purchased several years earlier. Plaintiff Mountain Business Center, LLC (MBC) was a tenant in the building at the time of Fork Road’s purchase. In connection with the purchase, MBC was to provide an estoppel certificate listing, and among other things, subtenant identities and sublease rent payment information. MBC returned the estoppel certificate, but did not provide the requested information concerning the subtenants and sublease rental payments. Fork Road proceeded with the purchase without this information, gave notice to MBC to vacate the premises, and notified the subtenants that Fork Road would be taking over the subleases. MBC refused to vacate and Fork Road filed an eviction action in the Wyoming circuit court. MBC appealed to the district court, which ruled the parties were bound by an arbitration clause in their agreement.

The dispute proceeded to arbitration. MBC and Fork Road submitted a “Stipulated List of Issues to be Determined by the Arbitrator,” which the arbitrator then consolidated and summarized. The result was seven claims by Fork Road and eight claims by MBC, largely related to various alleged breaches of the underlying lease agreement. After a five-day hearing, the arbitrator issued a 47 page decision in which he decided all issues presented, and ruled “for and against both MBC and Fork Road” on their various claims. The arbitrator determined that MBC sustained damages of $35,750, and that Fork Road sustained damages of $11,752. Fork Road was permitted to offset MBC’s damages with the damages it had incurred, and in so doing, the arbitrator rejected MBC’s argument that the “first-to-breach rule” prevented the off-set. The arbitrator also decided MBC was not the prevailing party and not entitled to attorney’s fees. MBC appealed to the district court, which confirmed the award.

MBC then appealed to the Wyoming Supreme Court. First, MBC alleged the arbitrator exceeded his authority “by making factual and legal determination of issues not submitted to him.” The court disagreed, concluding that the arbitrator “properly relied on the stipulated list to determine the issues before him….” Second, the court also rejected MBC’s arguments that it was manifest error of law when the arbitrator determined (1) MBC was not the prevailing party and therefore not entitled to attorney’s fees; and (2) MBC was not entitled to the benefit of the “first-to-breach rule.” The court affirmed the district court’s order, concluding “the arbitrator did not exceed his authority in determining the issues presented to him…” and “did not commit manifest error in its prevailing party and first-to-breach rule analysis.”

Mountain Business Center, LLC v. Fork Road, LLC, Docket No. S-22-0090 (Supreme Court of Wyoming, Nov. 23, 2022)

First Circuit Affirms Order Compelling Arbitration and Rejecting Claim By Postmates Couriers of Exemption From the FAA

February 10, 2023 by Kenneth Cesta

In Damon Immediato, et al., v. Postmates, Inc., the First Circuit addressed the issue of whether couriers who deliver goods from local restaurants and grocery stores are “transportation workers engaged in interstate commerce such that they are exempt from the Federal Arbitration Act.” The court affirmed the district’s court’s decision granting defendant’s motion to compel arbitration and concluding that the plaintiffs were not exempt from the FAA.

The defendant, Postmates, operates an online platform that allows customers to order local takeout and certain products from local grocery stores. Plaintiffs are couriers for Postmates who made deliveries to customers in the Boston area. When plaintiffs registered as couriers, they were required to accept Postmates “Fleet Agreement” which, among other things, classifies the couriers as independent contractors and includes a mutual arbitration provision governed by the FAA. The arbitration provision requires all disputes be resolved through final and binding arbitration under AAA Rules, but allows a courier to opt-out of the arbitration provision within 30 days of accepting the Fleet Agreement. Plaintiffs did not opt out of the arbitration provision.

Plaintiffs filed an action in Massachusetts state court on behalf of themselves and a putative class of couriers, alleging Postmates misclassified them as independent contractors and, as employees, they were entitled to benefits such as reimbursement of business expenses, the payment of a minimum wage, and paid sick leave. Postmates removed the action to federal court and moved to compel arbitration. Plaintiffs opposed the motion contending they were exempt from the FAA under 9 U.S.C. §1. The district court determined the exemption did not apply, granted Postmates’ motion to compel arbitration, and stayed the federal action pending the outcome of the arbitration. Plaintiffs accepted individual offers of judgment in the arbitration and the district court dismissed the case.

On appeal, the plaintiffs argued they “belong to a class of workers encompassed by the residual clause of section 1 and are therefore outside the grasp of the FAA.” Section 1 of the FAA provides, in part, “nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” The court noted, however, that the Supreme Court “has interpreted the residual clause of this exemption to apply only to ‘transportation workers,’ meaning workers who play a ‘necessary role’ in the interstate transport of goods.” [Citation omitted]. The court rejected plaintiffs’ argument, concluding “couriers who deliver meals and goods as the result of local purchases from local vendors are not within a class of workers ‘engaged in foreign or interstate commerce’ who are exempt from the FAA under section 1.” Plaintiffs also contended on appeal if they are not exempt from the FAA under section 1, then their contracts with Postmates must be outside the coverage of section 2 of the FAA, “which extends the FAA’s reach to all contracts ‘involving’ interstate commerce. 9 U.S.C. §1, 2.” The court rejected this argument as well, concluding “appellants’ employment contracts are covered under section 2 of the Act because couriers who make local retail deliveries affect interstate commerce, but those contracts are not exempt under section 1 because the appellants are not part of a class of workers actively engaged in the interstate transport of goods. The district court was therefore required to compel arbitration according to the terms agreed to by the parties.”

Damon Immediato, et al, v. Postmates, Inc., No. 22-1015 (1^st Cir. Nov. 29, 2022)